A Ban on Internet Access Taxes Could Cost States Millions in Revenue

The Permanent Internet Tax Freedom Act would no longer let states or localities tax citizens for Internet usage.

The U.S. House Judiciary Committee approved the Permanent Internet Tax Freedom Act (PITFA) in a 30-4 vote June 18, clearing a hurdle for a bill that would extend the current ban on Internet access taxes indefinitely and eliminate a source of tax revenue for states that qualified for an exception when the act was first signed into law. The proposed legislation will continue to ban federal, state and local governments from taxing Internet access, including taxes on email, bandwidth and charges levied by Internet service providers.

The version of the bill that the committee passed would remove an exception for states that were permitted to keep their existing Internet access taxes under a grandfather clause when the Internet Tax Freedom Act (ITFA) was first passed, arousing concerns of revenue loss for the seven states that still levy taxes on Internet service providers' charges.

ITFA was signed into law by President Bill Clinton in 1998 and extended by President George W. Bush in 2007. The sunset provision in the act's current language set an expiration date of November 1, 2014. As its name implies, PITFA would remove the sunset provision, extending the limits on states' rights to tax Internet access indefinitely.

Seven states (Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin) currently tax Internet access under ITFA's 1998 grandfather clause. Tennessee, Washington, and New Hampshire are permitted to collect Internet access taxes but do not currently do so. All ten of these states would lose their ability to tax their residents' Internet access if PITFA is signed into law.

The law was originally enacted to encourage the free flow of commerce on the Internet, using Congress’s authority to regulate interstate commerce to prevent states and localities from imposing taxes on Internet access. Critics of the bill, including the National Association of Counties, assert that these protections were written when Internet commerce was still developing and are no longer necessary.

States and localities that currently tax Internet access could lose a total of hundreds of millions of dollars if the legislation is passed. Experts are still compiling estimates of how much the elimination of the grandfather clause would cost each state. A 2003 estimate from the Congressional Budget Office stated that removing the grandfather provision could cause states to lose between $80 million and $120 million in revenue each year, about 0.1 percent of these states' annual tax revenues.

Extending the ITFA limitations could impact local governments as well as states. Currently, counties can collect franchise fees up to five percent of a cable operator's revenue. However, cable companies can avoid taxes on their TV and Internet by offering it in a single bundle that cannot be taxed under ITFA. Further, Internet Protocol television, which is delivered via the Internet instead of cable or satellite, meaning that bundles like AT&T's U-Verse that contain IPTV services are exempt from both state taxation and county franchise fees, according to the National Association of Counties.

As of now, PITFA appears likely to pass in both houses of Congress if it reaches a vote. The legislation has 226 cosponsors in the House of Representatives, placing it safely over the 218 vote threshold required for a bill to pass the House. The Senate version of the bill, called the Internet Tax Freedom Forever Act, has 50 cosponsors, although it stalled when was brought to the Senate Finance Committee last August.

The National Governors Association came out against the bill, saying that the legislation would infringe on states' rights to manage their own fiscal systems. "Leveling the playing field for all retailers is a priority for governors, consistent with federalism and the best opportunity for states, Congress and the business community to work together," reads a press release from the NGA.

TechAmerica, a trade association and lobbying organization for companies in the technology sector, supports the House Judiciary Committee's plan to move forward with making the ITFA permanent. "The Internet is now a basic necessity for our business and personal lives, and we must not allow federal, state or local taxes to hinder access for all Americans," according to a TechAmerica statement released June 17.